Module 3 constructing financial statements and analyzing transactions
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Module 3: Constructing Financial Statements and Analyzing Transactions. The Accounting Cycle. T-Accounts and Journal Entries. Cash Dividends.

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Module 3: Constructing Financial Statements and Analyzing Transactions

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Module 3:Constructing Financial Statements and Analyzing Transactions


The Accounting Cycle


T-Accounts and Journal Entries


Cash Dividends

  • All transactions between the company and its shareholders are considered financing transactions. This includes payment of dividends, the issuance of stock, and any subsequent stock repurchase.

  • Financing transactions affect only the balance sheet; they do not affect the income statement.


Adjusting Accounts


Types of Adjustments

  • Cash received or paid before recognition of revenue or expense:

    • Prepaid expenses

    • Unearned revenues

  • Cash received or paid after recognition of revenue or expense

    • Accrued expenses

    • Accrued revenues


Prepaid Expenses (Assets)

  • Assume that Apple pays $200 to purchase time on MTV for future iPod ads. Apple’s cash account decreases by $200, and an asset called prepaid advertising increases by the same amount.


Unearned Revenues (Liabilities)

  • Assume that Apple receives $400 cash from a customer as advance payment on a multi-unit iPod sale to be delivered next month.


Recognition of Unearned Revenue as Earned Revenue

  • Assume that Apple delivers the iPods a month later (but still within the fiscal quarter).


Accrued Expenses (Liabilities)

  • Assume that Apple’s sales staff earns $100 of sales commissions this period that will not be paid until next period.


Accrued Revenues (Assets)

  • Assume that Apple delivers iPods to a customer in Germany who will pay next quarter. The sales price for those units is $500 and the cost is $400.


Unadjusted

Trial Balance

(not 100% Accrual Basis)

Adjusting

Entries

Adjusted

Trial Balance

(100% Accrual Basis)

Create

Financial Statements

I/S

B/S

SCF

SE

Apple’s transactions thus far …


Trial Balance

  • The trial balance is a listing of all accounts and their balances at a point in time.

  • Its purpose is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements.


Adjusted Trial Balance For Apple


Preparation of the Financial Statements

  • Income Statement


Preparation of the Financial Statements

  • Retained Earnings Computation


Preparation of the Financial Statements

  • Balance Sheet


Preparation of the Financial Statements

  • Statement of Stockholders’ Equity


Preparation of the Financial Statements

  • Statement of Cash Flows (from cash column)


Statement of Cash Flows – Indirect Method

  • Operating cash flows:


ASSET

A/R

Beg balance xx

xxx Cash Collections

Credit Sales xxx

Ending balance xx

Cash Generated (Used) from changes in Balance Sheet Accounts

Cash Basis #

Accrual Basis #


Cash Generated (Used) from changes in Balance Sheet Accounts

LIABLITY

A/P

xx Beg balance

Cash Basis #

Accrual Basis #

Cash Payments xxx

xxx Purchases on Credit

xx Ending balance


Formal Presentation of Apple’s SCF


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