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

Module 3:Constructing Financial Statements and Analyzing Transactions


The accounting cycle

The Accounting Cycle


T accounts and journal entries

T-Accounts and Journal Entries


Cash dividends

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

Adjusting Accounts


Types of adjustments

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

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

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

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

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

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.


Module 3 constructing financial statements and analyzing transactions

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

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

Adjusted Trial Balance For Apple


Preparation of the financial statements

Preparation of the Financial Statements

  • Income Statement


Preparation of the financial statements1

Preparation of the Financial Statements

  • Retained Earnings Computation


Preparation of the financial statements2

Preparation of the Financial Statements

  • Balance Sheet


Preparation of the financial statements3

Preparation of the Financial Statements

  • Statement of Stockholders’ Equity


Preparation of the financial statements4

Preparation of the Financial Statements

  • Statement of Cash Flows (from cash column)


Statement of cash flows indirect method

Statement of Cash Flows – Indirect Method

  • Operating cash flows:


Cash generated used from changes in balance sheet accounts

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 accounts1

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

Formal Presentation of Apple’s SCF


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