Adjusting Accounts for Financial Statements Chapter 3 Wild

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Adjusting Accounts for Financial Statements Chapter 3 Wild and Shaw Financial and Managerial Accounting

Adjusting Accounts for Financial Statements Chapter 3 Wild and Shaw Financial and Managerial Accounting 8 th Edition © 2019 Mc. Graw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of Mc. Graw-Hill Education.

Chapter 3 Learning Objectives CONCEPTUAL C 1 Explain the importance of periodic reporting and

Chapter 3 Learning Objectives CONCEPTUAL C 1 Explain the importance of periodic reporting and the role of accrual accounting. C 2 Identify steps in the accounting cycle. C 3 Explain and prepare a classified balance sheet. ANALYTICAL A 1 Compute the profit margin and describe its use in analyzing company performance. A 2 Compute the current ratio and describe what it reveals about a company’s financial condition. PROCEDURAL P 1 Prepare adjusting entries for deferral of expenses. P 2 Prepare adjusting entries for deferral of revenues. P 3 Prepare adjusting entries for accrued expenses. P 4 Prepare adjusting entries for accrued revenues. P 5 Explain and prepare an adjusted trial balance. P 6 Prepare financial statements from an adjusted trial balance. P 7 Describe and prepare closing entries. P 8 Explain and prepare a post-closing trial balance. P 9 Appendix 3 A—Explain the alternatives in accounting for prepaids. P 10 Appendix 3 B – Prepare a work sheet and explain its usefulness. P 11 Appendix 3 C – Prepare reversing entries and explain their purpose. ©Mc. Graw-Hill Education. 2

Learning Objective C 1 Explain the importance of periodic reporting and the role of

Learning Objective C 1 Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 3

The Accounting Period Exhibit 3. 1 Access the text alternative for slide images. Learning

The Accounting Period Exhibit 3. 1 Access the text alternative for slide images. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 4

Accrual Basis versus Cash Basis Definitions Accrual Basis Revenues are recorded when products or

Accrual Basis versus Cash Basis Definitions Accrual Basis Revenues are recorded when products or services are delivered, and records expenses when incurred. Cash Basis Revenues are recorded when cash is received and expenses are recorded when cash is paid. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 5

Accrual Basis versus Cash Basis Accrual Basis Example Exhibit 3. 2 On the accrual

Accrual Basis versus Cash Basis Accrual Basis Example Exhibit 3. 2 On the accrual basis, $100 of insurance expense is recognized in 2019, $1, 200 in 2020, and $1, 100 in 2021. The expense is matched with the periods benefited by the insurance coverage. Access the text alternative for slide images. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 6

Accrual Basis versus Cash Basis Example Exhibit 3. 3 On December 1, 2019, Fast.

Accrual Basis versus Cash Basis Example Exhibit 3. 3 On December 1, 2019, Fast. Forward paid $2, 400 cash for a twentyfour month business insurance policy. Using the cash basis, the entire $2, 400 would be recognized as insurance expense in 2019. No insurance expense from this policy would be recognized in 2020 or 2021, periods covered by the policy. Access the text alternative for slide images. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 7

Recognizing Revenues The revenue recognition requires that revenue be recorded when the goods or

Recognizing Revenues The revenue recognition requires that revenue be recorded when the goods or services are provided to customer and at an amount expected to be received from customers. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 8

Recognizing Expenses The expense recognition (or matching) requires that expenses be recorded in the

Recognizing Expenses The expense recognition (or matching) requires that expenses be recorded in the same accounting period as the revenues that are recognized as a result of those expenses. This matching of expenses with the revenue benefits is a major part of the adjusting process. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 9

Framework for Adjustments Four types of adjustments for transactions that extend over more than

Framework for Adjustments Four types of adjustments for transactions that extend over more than one period. Adjustments made using a 3 -step process: Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record an adjusting entry to get from step 1 to step 2. Learning Objective C 1: Explain the importance of periodic reporting and the role of accrual accounting. ©Mc. Graw-Hill Education. 10

Learning Objective P 1 Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education.

Learning Objective P 1 Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 11

Prepaid (Deferred) Expenses Prepaid expenses are assets paid for in advance of receiving their

Prepaid (Deferred) Expenses Prepaid expenses are assets paid for in advance of receiving their benefits. Examples: Prepaid Insurance, Prepaid Rent, Supplies Exhibit 3. 5 Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 12

Adjusting for Prepaid Insurance Step 1: Determine current balance: • Fast. Forward paid $2,

Adjusting for Prepaid Insurance Step 1: Determine current balance: • Fast. Forward paid $2, 400 to cover insurance for 24 months that began on December 1 of 2019. • Fast. Forward recorded the expenditure as Prepaid Insurance on December 1. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 13

Adjusting for Prepaid Insurance Step 2: Balance in balance in prepaid insurance should equal

Adjusting for Prepaid Insurance Step 2: Balance in balance in prepaid insurance should equal $2, 300. On 12/31, one month’s worth of insurance has expired. Insurance Expense is debited $100 to recognize the amount of insurance coverage for Dec. and Prepaid Insurance is credited for $100 to reduce its balance. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 14

Adjusting for Prepaid Insurance Step 3 Access the text alternative for slide images. Learning

Adjusting for Prepaid Insurance Step 3 Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 15

Adjusting Entry for Prepaid Insurance The general journal adjustment on Dec. 31 and general

Adjusting Entry for Prepaid Insurance The general journal adjustment on Dec. 31 and general ledger account balances are as follows: Dec. 31 Insurance Expense Prepaid Insurance 100 To record first month’s expired insurance Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 16

Adjusting for Supplies Steps 1 and 2 Step 1: Fast. Forward purchased $9, 720

Adjusting for Supplies Steps 1 and 2 Step 1: Fast. Forward purchased $9, 720 of supplies in December. Some of these were used during December. Step 2: A physical count shows that unused supplies equal $8, 670. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 17

Adjusting for Supplies Step 3: Adjusting entry reduces Supplies by $1, 050 or the

Adjusting for Supplies Step 3: Adjusting entry reduces Supplies by $1, 050 or the difference between the beginning balance and the physical count. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 18

Adjusting Entry – Supplies We’ve seen the adjustment in the T-accounts but we need

Adjusting Entry – Supplies We’ve seen the adjustment in the T-accounts but we need to record the adjustment on Dec. 31, in the General Journal. Dec. 31 Supplies Expense Supplies 1, 050 To record supplies used Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 19

Depreciation Instead of expensing the cost of a plant asset (equipment, building, cars, etc.

Depreciation Instead of expensing the cost of a plant asset (equipment, building, cars, etc. ) in the year it is purchased, we allocate or spread out the cost over their expected useful lives. begin underline end underline The formula for straight-line depreciation is: Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 20

Useful Life • The period of time that an asset is expected to help

Useful Life • The period of time that an asset is expected to help produce revenues. • Useful life expires as a result of wear and tear, or because it no longer satisfies the needs of the business. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 21

Salvage Value The expected market value or selling price of an asset at the

Salvage Value The expected market value or selling price of an asset at the end of its useful life. Also called: • Scrap Value or • Residual Value Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 22

Adjusting for Depreciation – Step 1 • Step 1: Fast. Forward purchased equipment on

Adjusting for Depreciation – Step 1 • Step 1: Fast. Forward purchased equipment on Dec. 1 for $26, 000. • It has an estimated useful life of 5 years. • The equipment is expected to be worth about $8, 000 at the end of 5 years. • They purchased the equipment on Dec. 1 but it is now Dec. 31. Because Fast. Forward expects the equipment to be worth $8, 000 when the 5 years are over, only $18, 000 of the cost needs to be spread over the next 60 months. begin underline Learning Objective P 1: Prepare adjusting entries for deferral of expenses. end underline ©Mc. Graw-Hill Education. 23

Straight-Line Depreciation Step 1: Fast. Forward purchased equipment on December 1 for $26, 000.

Straight-Line Depreciation Step 1: Fast. Forward purchased equipment on December 1 for $26, 000. Calculate Net Cost (amount to depreciate). Original Cost − Salvage Value = Net Cost $26, 000 − $8, 000 = $18, 000 Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 24

Adjusting for Depreciation – Step 2 • Step 2: Equipment has a useful live

Adjusting for Depreciation – Step 2 • Step 2: Equipment has a useful live of 5 years. The equipment is expected to be worth $8, 000 at the end of 5 years. Fast. Forward uses straight-line depreciation. $18, 000 ($26, 000 − $8, 000) of the cost needs to be spread over the next 60 months. begin underline Learning Objective P 1: Prepare adjusting entries for deferral of expenses. end underline ©Mc. Graw-Hill Education. 25

Adjusting for Depreciation – Step 3 Depreciation adjustment reflected in our T-accounts looks like

Adjusting for Depreciation – Step 3 Depreciation adjustment reflected in our T-accounts looks like this: • Step 3: Record adjusting entry for $300 for one month. • The depreciation amount of $300 is credited to this account instead of the asset account. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 26

Adjusting Entry for Depreciation Dec. 31 Depreciation Expense Accumulated Depreciation - Equipment 300 To

Adjusting Entry for Depreciation Dec. 31 Depreciation Expense Accumulated Depreciation - Equipment 300 To record monthly equipment depreciation Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 27

Depreciation – Balance Sheet Exhibit 3. 7 After three months of depreciation have been

Depreciation – Balance Sheet Exhibit 3. 7 After three months of depreciation have been taken, Equipment is shown net of accumulated depreciation. Access the text alternative for slide images. Learning Objective P 1: Prepare adjusting entries for deferral of expenses. ©Mc. Graw-Hill Education. 28

Learning Objective P 2 Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education.

Learning Objective P 2 Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education. 29

Deferral of Revenue Unearned revenue is cash received in advance of providing products or

Deferral of Revenue Unearned revenue is cash received in advance of providing products or services. Exhibit 3. 8 Access the text alternative for slide images. Learning Objective P 2: Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education. 30

Adjusting for Unearned Revenues – Steps 1 and 2 Step 1: Fast. Forward’s client

Adjusting for Unearned Revenues – Steps 1 and 2 Step 1: Fast. Forward’s client paid 60 -day fee in advance covering the period from 12/27 to 2/24 and recorded: Dec. 26 Cash 3, 000 Unearned Consulting Revenue 3, 000 Received advance payment for services Step 2: Fast. Forward earns payment as time passes. At 12/31, 5 days’ service is earned or 5/60 × $3, 000 = $250. Step 3: Adjusting entry reduces liability, Unearned Consulting Revenue, by $250 or 5 days’ worth of revenue. Also, Consulting Revenue of $250 is earned. Learning Objective P 2: Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education. 31

Adjusting for Unearned Revenues – Step 3 Access the text alternative for slide images.

Adjusting for Unearned Revenues – Step 3 Access the text alternative for slide images. Learning Objective P 2: Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education. 32

Adjusting Entry for Unearned Revenue Adjusting entry recorded on Dec. 31 to transfer $250

Adjusting Entry for Unearned Revenue Adjusting entry recorded on Dec. 31 to transfer $250 from unearned to earned consulting revenue. Dec. 31 Unearned Consulting Revenue 250 Consulting Revenue 250 To record earned revenue received in advance Learning Objective P 2: Prepare adjusting entries for deferral of revenues. ©Mc. Graw-Hill Education. 33

Learning Objective P 3 Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 34

Learning Objective P 3 Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 34

Accrued Expense Costs incurred in a period that are both unpaid and unrecorded. Exhibit

Accrued Expense Costs incurred in a period that are both unpaid and unrecorded. Exhibit 3. 9 Access the text alternative for slide images. Learning Objective P 3: Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 35

Adjusting for Accrued Salaries – Steps 1, 2 and 3 Step 1: Fast. Forward

Adjusting for Accrued Salaries – Steps 1, 2 and 3 Step 1: Fast. Forward pays its employee $70 per day, or $350 for a five-day work. Salaries are paid every two weeks on a Friday. Step 2: 12/31 is a Wednesday, so three days’ salaries are owed at year end which equals $70 × 3 = $210. Step 3: Adjusting entry increases a liability, Salaries Payable, and increases the Salaries Expense account for $210 with the following journal entry: Dec. 31 Salaries Expense 210 Salaries Payable 210 To record three days’ accrued salaries. Learning Objective P 3: Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 36

Adjusting for Accrued Salaries - Financial Statements Access the text alternative for slide images.

Adjusting for Accrued Salaries - Financial Statements Access the text alternative for slide images. Learning Objective P 3: Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 37

Future Payment of Accrued Expenses Accrued expenses at the end of one period result

Future Payment of Accrued Expenses Accrued expenses at the end of one period result in a cash payment in a future period. On 12/31, Fast. Forward recorded accrued salaries of $210. On 1/9 of the next year, the following entry will reduce the accrued liability, salaries payable, and record the expense for 7 days work in January. Jan 9 Salaries Payable (3 × $70) 210 Salaries Expense (7 × $70) 490 Cash 700 To record earned revenue received in advance Learning Objective P 3: Prepare adjusting entries for accrued expenses. ©Mc. Graw-Hill Education. 38

Learning Objective P 4 Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 39

Learning Objective P 4 Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 39

Accrued Revenue Accrued revenues are revenues earned in a period that are both unrecorded

Accrued Revenue Accrued revenues are revenues earned in a period that are both unrecorded and not yet received in cash or other assets. Exhibit 3. 11 Access the text alternative for slide images. Learning Objective P 4: Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 40

Adjusting for Accrued Services Revenue – Steps 1, 2, and 3 Step 1: On

Adjusting for Accrued Services Revenue – Steps 1, 2, and 3 Step 1: On 12/12, Fast. Forward’s customer agreed to pay $2, 700 on 1/10 of the next year for future services over the next 30 days. Step 2: 12/31, 20 days’ worth of services have been provided and earned, which totals $1, 800 ($2, 700 × 20/30 days). Step 3: Adjusting entry increases an asset, Accounts Receivable, and increases the Consulting Revenue account for $1, 800 with the following journal entry: Dec. 31 Accounts Receivable 1, 800 Consulting Revenue 1, 800 To record 20 days’ accrued revenue. Learning Objective P 4: Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 41

Adjusting for Accrued Services Revenue – Financial Statements Access the text alternative for slide

Adjusting for Accrued Services Revenue – Financial Statements Access the text alternative for slide images. Learning Objective P 4: Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 42

Future Receipt of Accrued Revenues Accrued revenue at the end of one period results

Future Receipt of Accrued Revenues Accrued revenue at the end of one period results in a cash receipt in a future period. On 12/31, Fast. Forward recorded accrued revenue earned of $1, 800. On 1/10 of the next year, the following entry will reduce the accounts receivable, record revenue earned for 10 days and receipt of $2, 700 cash. Jan. 10 Cash 2, 700 Accounts Receivable (20 days) 1, 800 Consulting Revenue (10 days) 900 To record earned revenue received in advance Learning Objective P 4: Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 43

Links to Financial Statements Exhibit 3. 12 Summary of Adjustments and Financial Statement Links.

Links to Financial Statements Exhibit 3. 12 Summary of Adjustments and Financial Statement Links. Access the text alternative for slide images. Learning Objective P 4: Prepare adjusting entries for accrued revenues. ©Mc. Graw-Hill Education. 44

Learning Objective P 5 Explain and prepare an adjusted trial balance. ©Mc. Graw-Hill Education.

Learning Objective P 5 Explain and prepare an adjusted trial balance. ©Mc. Graw-Hill Education. 45

Adjusted Trial Balance Exhibit 3. 13 Access the text alternative for slide images. Learning

Adjusted Trial Balance Exhibit 3. 13 Access the text alternative for slide images. Learning Objective P 5: Explain and prepare an adjusted trial balance. ©Mc. Graw-Hill Education. 46

Learning Objective P 6 Prepare financial statements from an adjusted trial balance. ©Mc. Graw-Hill

Learning Objective P 6 Prepare financial statements from an adjusted trial balance. ©Mc. Graw-Hill Education. 47

Preparing Financial Statements from an Adjusted Trial Balance 1 Step 1—Prepare income statement using

Preparing Financial Statements from an Adjusted Trial Balance 1 Step 1—Prepare income statement using revenue and expense accounts from adjusted trial balance. Step 2—Prepare statement of retained earnings using retained earnings and dividends from adjusted trial balance; and pull net income from step 1. Step 3—Prepare balance sheet using asset and liability account from adjusted trial balance; and pull updated retained earnings balance from step 2. Step 4—Prepare statement of cash flows from changes in cash flows for the period (illustrated later in the book). Learning Objective P 6: Prepare financial statements from an adjusted trial balance. ©Mc. Graw-Hill Education. 48

Preparing Financial Statements from an Adjusted Trial Balance 2 Exhibit 3. 14 Access the

Preparing Financial Statements from an Adjusted Trial Balance 2 Exhibit 3. 14 Access the text alternative for slide images. Learning Objective P 6: Prepare financial statements from an adjusted trial balance. ©Mc. Graw-Hill Education. 49

Learning Objective P 7 Describe and prepare closing entries. ©Mc. Graw-Hill Education. 50

Learning Objective P 7 Describe and prepare closing entries. ©Mc. Graw-Hill Education. 50

Closing Process 1. Resets revenue, expense, and dividends account balances to zero at the

Closing Process 1. Resets revenue, expense, and dividends account balances to zero at the end of the period. 2. Helps summarize a period’s revenues and expenses in the Income Summary account. Learning Objective P 7: Describe and prepare closing entries. Identify accounts for closing. Record and post closing entries. Prepare postclosing trial balance. ©Mc. Graw-Hill Education. 51

Temporary and Permanent Accounts Access the text alternative for slide images. Learning Objective P

Temporary and Permanent Accounts Access the text alternative for slide images. Learning Objective P 7: Describe and prepare closing entries. ©Mc. Graw-Hill Education. 52

Recording Closing Entries 1 1. Close Credit Balances in Revenue Accounts to Income Summary.

Recording Closing Entries 1 1. Close Credit Balances in Revenue Accounts to Income Summary. 2. Close Debit Balances in Expense accounts to Income Summary. 3. Close Income Summary account to Retained Earnings. 4. Close Dividends to Retained Earnings. Learning Objective P 7: Describe and prepare closing entries. ©Mc. Graw-Hill Education. 53

Recording Closing Entries 2 Exhibit 3. 15 Access the text alternative for slide images.

Recording Closing Entries 2 Exhibit 3. 15 Access the text alternative for slide images. Learning Objective P 7: Describe and prepare closing entries. ©Mc. Graw-Hill Education. 54

Learning Objective P 8 Explain and prepare a post-closing trial balance. ©Mc. Graw-Hill Education.

Learning Objective P 8 Explain and prepare a post-closing trial balance. ©Mc. Graw-Hill Education. 55

Post-Closing Trial Balance 1 • List of permanent accounts and their balances after posting

Post-Closing Trial Balance 1 • List of permanent accounts and their balances after posting closing entries. • Total debits and credits must be equal. Learning Objective P 8: Explain and prepare a post-closing trial balance. ©Mc. Graw-Hill Education. 56

Post-Closing Trial Balance 2 Exhibit 3. 18 Access the text alternative for slide images.

Post-Closing Trial Balance 2 Exhibit 3. 18 Access the text alternative for slide images. Learning Objective P 8: Explain and prepare a post-closing trial balance. ©Mc. Graw-Hill Education. 57

Learning Objective C 2 Identify steps in the accounting cycle. ©Mc. Graw-Hill Education. 58

Learning Objective C 2 Identify steps in the accounting cycle. ©Mc. Graw-Hill Education. 58

Accounting Cycle Exhibit 3. 19 Access the text alternative for slide images. Learning Objective

Accounting Cycle Exhibit 3. 19 Access the text alternative for slide images. Learning Objective C 2: Identify steps in the accounting cycle. ©Mc. Graw-Hill Education. 59

Learning Objective C 3 Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education.

Learning Objective C 3 Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 60

Classified Balance Sheet Exhibit 3. 20 Assets Liabilities and Equity Current assets Current liabilities

Classified Balance Sheet Exhibit 3. 20 Assets Liabilities and Equity Current assets Current liabilities Noncurrent assets Noncurrent liabilities Long-term investments Equity Plant assets Blank Intangible assets Blank Current items are expected to come due (collected and owed) within the longer of one year or the company’s normal operating cycle. Most operating cycles are less than one year, so most companies use a one year period in deciding what assets and liabilities are current. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 61

Current Assets Current assets are expected to be sold, collected, or used within one

Current Assets Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 62

Long-Term Investments Long-term investments are expected to be held for more than one year

Long-Term Investments Long-term investments are expected to be held for more than one year or the operating cycle. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 63

Plant Assets Plant assets are tangible long-lived assets used to produce or sell products

Plant Assets Plant assets are tangible long-lived assets used to produce or sell products and services. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 64

Intangible Assets Intangible assets are long-term assets used to produce or sell products and

Intangible Assets Intangible assets are long-term assets used to produce or sell products and services and that lack physical form. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 65

Current Liabilities Current liabilities are liabilities due within the longer of one year or

Current Liabilities Current liabilities are liabilities due within the longer of one year or the company’s operating cycle. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 66

Long-Term Liabilities Long-term liabilities are liabilities not due within the longer of one year

Long-Term Liabilities Long-term liabilities are liabilities not due within the longer of one year or the company’s operating cycle. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 67

Equity is the owner’s claim on the assets. Learning Objective C 3: Explain and

Equity is the owner’s claim on the assets. Learning Objective C 3: Explain and prepare a classified balance sheet. ©Mc. Graw-Hill Education. 68

Learning Objective A 1 Compute profit margin and describe its use in analyzing company

Learning Objective A 1 Compute profit margin and describe its use in analyzing company performance. ©Mc. Graw-Hill Education. 69

Profit Margin The profit margin ratio measures the company’s net income to net sales.

Profit Margin The profit margin ratio measures the company’s net income to net sales. Visa and Mastercard’s Profit Margin Company Figure ($ millions) Current Year 1 Year Ago 2 Years Ago Visa Net income $ 6, 699 $ 5, 991 $ 6, 328 Blank Net sales $18, 358 $15, 082 $13, 880 Blank Profit margin 36% 40% 46% Mastercard Profit margin 31% 38% 39% Learning Objective A 1: Compute profit margin and describe its use in analyzing company performance. ©Mc. Graw-Hill Education. 70

Learning Objective A 2 Compute the current ratio and describe what it reveals about

Learning Objective A 2 Compute the current ratio and describe what it reveals about a company’s financial condition. ©Mc. Graw-Hill Education. 71

Current Ratio Helps assess the company’s ability to pay its debts in the near

Current Ratio Helps assess the company’s ability to pay its debts in the near future. Exhibit 3. 25 Costco and Walmart’s Current Ratio Company Figure ($ millions) Current Year 1 Year Ago 2 Years Ago Costco Current assets $17, 317 $15, 218 $16, 779 Blank Current liabilities $17, 495 $15, 575 $16, 539 Blank Current ratio 0. 99 0. 98 1. 01 Walmart Current ratio 0. 86 0. 93 0. 97 Learning Objective A 2: Compute the current ratio and describe what it reveals about a company’s financial condition. ©Mc. Graw-Hill Education. 72

Learning Objective P 9 Appendix 3 A Explain the alternative in accounting for prepaids.

Learning Objective P 9 Appendix 3 A Explain the alternative in accounting for prepaids. ©Mc. Graw-Hill Education. 73

Alternative Accounting for Prepayments Exhibits 3 A. 1 & 3 A. 2 An alternative

Alternative Accounting for Prepayments Exhibits 3 A. 1 & 3 A. 2 An alternative method is to record all prepaid expenses with debits to expense accounts. The adjusting entry depends on how the original payment was recorded. Access the text alternative for slide images. Learning Objective P 9: Explain the alternative in accounting for prepaids. ©Mc. Graw-Hill Education. 74

Alternative Accounting for Prepayments – Account Balances Exhibit 3 A. 3 Access the text

Alternative Accounting for Prepayments – Account Balances Exhibit 3 A. 3 Access the text alternative for slide images. Learning Objective P 9: Explain the alternative in accounting for prepaids. ©Mc. Graw-Hill Education. 75

Alternative Accounting for Revenues Exhibits 3 A. 4 & 3 A. 5 An alternative

Alternative Accounting for Revenues Exhibits 3 A. 4 & 3 A. 5 An alternative method is to record all revenues to a liability account or a revenue account. The adjusting entry depends on how the original receipt was recorded. Access the text alternative for slide images. Learning Objective P 9: Explain the alternative in accounting for prepaids. ©Mc. Graw-Hill Education. 76

Alternative Accounting for Revenues – Account Balances Exhibits 3 A. 6 Access the text

Alternative Accounting for Revenues – Account Balances Exhibits 3 A. 6 Access the text alternative for slide images. Learning Objective P 9: Explain the alternative in accounting for prepaids. ©Mc. Graw-Hill Education. 77

Learning Objective P 10 Appendix 3 B Prepare a work sheet and explain its

Learning Objective P 10 Appendix 3 B Prepare a work sheet and explain its usefulness. ©Mc. Graw-Hill Education. 78

Benefits of a Work Sheet Reduces risk of errors. Helps in preparing interim financial

Benefits of a Work Sheet Reduces risk of errors. Helps in preparing interim financial statements. Not a required report. Links accounts and their adjustments. Learning Objective P 10: Prepare a work sheet and explain its usefulness. Shows the effects of proposed transactions. ©Mc. Graw-Hill Education. 79

Use of a Work Sheet 1 Five steps: Step 1: Enter Unadjusted Trial Balance.

Use of a Work Sheet 1 Five steps: Step 1: Enter Unadjusted Trial Balance. Step 2: Enter Adjustments. Step 3: Prepare Adjusted Trial Balance. Step 4: Sort Adjusted Trial Balance Amounts to Financial Statements. Step 5: Total Statement Columns, Compute Income or Loss, and Balance Columns. Learning Objective P 10: Prepare a work sheet and explain its usefulness. ©Mc. Graw-Hill Education. 80

Use of a Work Sheet 2 Exhibit 3 B. 1 Access the text alternative

Use of a Work Sheet 2 Exhibit 3 B. 1 Access the text alternative for slide images. Learning Objective P 10: Prepare a work sheet and explain its usefulness. ©Mc. Graw-Hill Education. 81

Learning Objective P 11 Appendix 3 C Prepare reversing entries and explain their purpose.

Learning Objective P 11 Appendix 3 C Prepare reversing entries and explain their purpose. ©Mc. Graw-Hill Education. 82

Reversing Entries 1 Reversing entries are optional. They are recorded in response to accrued

Reversing Entries 1 Reversing entries are optional. They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company’s recordkeeping. Let’s see how the accounting for our payroll accrual will be handled with and without reversing entries. Learning Objective P 11: Prepare reversing entries and explain their purpose. ©Mc. Graw-Hill Education. 83

Reversing Entries 2 Exhibit 3 C. 1 Access the text alternative for slide images.

Reversing Entries 2 Exhibit 3 C. 1 Access the text alternative for slide images. Learning Objective P 11: Prepare reversing entries and explain their purpose. ©Mc. Graw-Hill Education. 84

Reversing Entries 3 Exhibit 3 C. 1 Access the text alternative for slide images.

Reversing Entries 3 Exhibit 3 C. 1 Access the text alternative for slide images. Learning Objective P 11: Prepare reversing entries and explain their purpose. ©Mc. Graw-Hill Education. 85

End of Chapter 3 ©Mc. Graw-Hill Education. 86

End of Chapter 3 ©Mc. Graw-Hill Education. 86