Copyright 2015 Mc GrawHill Education All rights reserved

Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Chapter 13 Financial Statements and Closing Procedures Section 1: Preparing the Financial Statements Section Objectives 13 -1 Prepare a classified income statement from the worksheet. 13 -2 Prepare a statement of owner’s equity from the worksheet. 13 -3 Prepare a classified balance sheet from the worksheet. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -2

Objective 13 -1 Prepare a classified income statement from the worksheet. The Classified Income Statement § A classified income statement is sometimes called a multiple-step income statement. Items are divided into groups of similar accounts. § There are subtotals within groups. § The classification and order of information depends on the type of business and the expected use of the statement. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -3

QUESTION: What is a single-step income statement? ANSWER: A single-step income statement is a format in which only one computation is needed to determine the net income. (Total Revenue – Total Expenses = Net Income) Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -4

Operating Revenue Net sales for Whiteside Antiques Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -5

Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory l Net delivered cost of purchases l Ending inventory l Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -6

Net Delivered Cost of Purchases Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -7

Total Merchandise Available for Sale Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -8

Cost of Goods Sold Beginning Merchandise Inventory Plus Net Delivered Cost of Purchases Cost of Goods Available for Sale Less Ending Inventory Cost of Goods Sold Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -9

Merchandise Inventory Account l Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. l Beginning and ending merchandise inventory balances appear on the income statement. l Ending merchandise inventory also appears on the balance sheet in the Assets section. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -10

Cost of Goods Sold Merchandise available for sale Cost of goods sold Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -11

Gross Profit on Sales l For Whiteside Antiques, net sales is the revenue earned from selling antique items. l Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period. l Gross profit is what is left to cover operating expenses and provide a profit. l Gross profit is the difference between the net sales and the cost of goods sold. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -12

Gross profit on sales for Whiteside Antiques Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -13

Operating Expenses Salaries for salespersons and advertising are examples of selling expenses Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -14

Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -15

Net income from operations Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -16

Other Income and Other Expenses Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -17

Net income from operations Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -18

Objective 13 -2 Prepare a statement of owner’s equity from the worksheet. l The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. l The ending capital balance for Bill Whiteside, $84, 576. 80, is used to prepare the balance sheet. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -19

Objective 13 -3 Prepare a classified balance sheet from the worksheet QUESTION: What are current assets? ANSWER: Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -20

Current Assets Current assets for Whiteside Antiques Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -21

Plant and Equipment l Noncurrent assets are called long-term assets. l An important category of long-term assets is plant and equipment. l For many businesses plant and equipment represents a sizable investment. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -22

Current Liabilities Whiteside Antiques Partial Balance Sheet December 31, 2016 Assets Prepaid Interest Total Current Assets Total Plant and Equipment Total Assets Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade Notes Payable-Bank Accounts Payable Interest Payable Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable Fed. Unemployment Tax Pay. State Unemployment Tax Pay. Salaries Payable Sales Tax Payable Total Current Liabilities 75. 00 Total current liabilities 6, 300. 00 98, 716. 00 31, 900. 00 130, 616. 00 2, 000. 00 9, 000. 00 24, 129. 00 20. 00 1, 158. 40 267. 40 990. 00 7. 20 64. 80 1, 200. 00 7, 200. 00 46, 036. 80 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -23

Long-Term Liabilities l Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. l Long-term liabilities include mortgages, notes payable, and loans payable. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -24

Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -25

Chapter 13 Financial Statements and Closing Procedures Section 2: Completing the Accounting Cycle Section Objectives 13 -4 Journalize and post the adjusting entries. 13 -5 Journalize and post the closing entries. 13 -6 Prepare a postclosing trial balance. 13 -7 Journalize and post reversing entries. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -26

Objective 13 -4 l All Journalize and post the adjusting entries adjustments are shown on the worksheet. l After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. l They are recorded in the general journal as adjusting journal entries and are posted to the general ledger. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -27

Adjusting Entries Type of Adjustment Worksheet Reference Purpose Inventory (a – b) Removes beginning inventory and adds ending inventory to the accounting records. Expense (c – e) Matches expense to revenue for the period; the credit is to a contra asset account. Accrued Expense (f – i) Matches expense to revenue for the period; the credit is to a liability account. Prepaid Expense (j –l) Matches expense to revenue for the period; the credit is to an asset account. Accrued Interest (m) Recognizes interest earned in the period. The debit is to an asset account, (interest receivable) and the credit is to a revenue account. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -28

Objective 13 -5 Journalize and Post the Closing Entries. l At the end of the period, the temporary accounts are closed. l The temporary accounts are: Revenue accounts l Cost of goods sold l Expense accounts l Drawing account l Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -29

There are four steps in the closing process: 1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. 2. Close expense accounts, cost of goods sold accounts with debit balances, and any contra revenue accounts with debit balances to Income Summary. 3. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. 4. Close the drawing account to owner's capital. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -30

Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances. GENERAL JOURNAL DATE DESCRIPTION 2016 Closing Entries Dec. 31 Sales Interest Income Miscellaneous Income Purchases Returns and Allowances Purchases Discounts Income Summary POST. REF. PAGE DEBIT 28 CREDIT 561, 650. 00 166. 00 3, 050. 00 3, 130. 00 568, 362. 00 When viewing the work sheet, debit each account, except Income Summary, for its balance. Credit Income Summary for the total. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -31

Step 2: When looking at the worksheet, close the expense accounts and the Cost of Goods Sold Accounts with debit Balances, as well as any contra revenue accounts with debit balances, to Income Summary. Credit each account, except Income Summary, for its balance. Debit Income Summary for the total. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -32

Step 3: Closing the Income Summary Account The third closing entry transfers the Income Summary balance to the owner's capital account. l This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. l For Whiteside Antiques, the third closing entry is as follows: l Income Summary Adjusting Entries (a-b) Closing Entries 12/31 52, 000. 00 512, 403. 80 564, 406. 20 12/31 Bal. 47, 000. 00 568, 362. 00 615, 362. 00 50, 958. 20 GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Income Summary Bill Whiteside, Capital POST. REF. 28 PAGE DEBIT CREDIT 50, 958. 20 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -33

Step 4: Closing the Drawing account This entry closes the drawing account and updates the capital account GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Bill Whiteside, Capital Bill Whiteside, Drawing POST. REF. 28 PAGE DEBIT CREDIT 27, 600. 00 Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -34

Posting the Closing Entries l The closing entries are posted from the general journal to the general ledger. l This process brings the temporary account balances to zero. l The word Closing is entered in the Description column. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -35

Objective 13 -6 Preparing a Postclosing Trial Balance l Prepare a postclosing trial balance to confirm that the general ledger is in balance. l Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance. l The postclosing trial balance matches the amounts reported on the balance sheet. l To verify this, compare the postclosing trial balance with the balance sheet. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -36

Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance Temporary accounts do not appear on the postclosing trial balance Revenue Cost of Goods Sold Expenses Withdrawals Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -37

Preparing a Postclosing Trial Balance Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -38

Objective 13 -7 Journalize and post reversing entries QUESTION: What are reversing entries? ANSWER: Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses. Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -39

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -40

Flow of Financial Data through an Accounting System Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -41

Thank You for using College Accounting, A Contemporary Approach, 3 rd Edition Haddock • Price • Farina Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -42