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© 2010 The McGraw-Hill Companies, Inc. All rights reserved. Chapter. 13. Financial Statements and Closing Procedures. Section 1: Preparing the Financial Statements. Section Objectives. Prepare a classified income statement from the worksheet.

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Chapter

13

Financial Statementsand Closing Procedures

Section 1: Preparing the Financial Statements

Section Objectives

  • Prepare a classified income statement from the worksheet.

  • Prepare a statement of owner’s equity from the worksheet.

  • Prepare a classified balance sheet from the worksheet.

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.


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Prepare a classified income statement from the worksheet

Objective 1

The Classified Income Statement

A classified income statement is sometimes called a multiple-step income statement.


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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)


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Operating Revenue

Net sales for Whiteside Antiques


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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

  • Net delivered cost of purchases

  • Ending inventory


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Net Delivered Cost of Purchases

Purchases

+ Freight In

(Purchases Returns and Allowances)

(Purchases Discounts)

Net Delivered Cost of Purchases


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Total Merchandise Available for Sale

Beginning Merchandise Inventory

+ Net Delivered Cost of Purchases

Total Merchandise Available for Sale


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(Ending Merchandise Inventory)

Cost of Goods Sold

Beginning Merchandise Inventory

+ Net Delivered Cost of Purchases

Total Merchandise Available for Sale

Cost of Goods Sold


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  • Beginning and ending merchandise inventory balances appear on the income statement.

  • Ending merchandise inventory also appears on the balance sheet in the Assets section.


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Cost of Goods Sold both the income statement and the balance sheet.

Merchandise available for sale

Cost of goods sold


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Gross Profit on Sales both the income statement and the balance sheet.

  • For Whiteside Antiques net sales is the revenue earned from selling antique items.

  • Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period.

  • Gross profit is what is left to cover operating expenses and provide a profit.

  • Gross profit is the difference between the net sales and the cost of goods sold


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Gross profit on sales for Whiteside Antiques both the income statement and the balance sheet.


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Operating Expenses both the income statement and the balance sheet.

Salaries for salespersons and advertising are examples of selling expenses


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Operating Expenses both the income statement and the balance sheet.

Rent, utilities, and salaries for office employees are examples of general and administrative expenses


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Net income from operations both the income statement and the balance sheet.


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Other Income and Other Expenses both the income statement and the balance sheet.


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Net income for Whiteside Antiques both the income statement and the balance sheet.


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Objective 2 both the income statement and the balance sheet.

Prepare a Statement of Owner’s Equity from the worksheet

  • The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period.

  • The ending capital balance for Bill Whiteside, $84,576.80, is used to prepare the balance sheet.


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Prepare a classified balance both the income statement and the balance sheet. 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.

Objective 3


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Current Assets both the income statement and the balance sheet.

Current assets for Whiteside Antiques


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Plant and Equipment both the income statement and the balance sheet.

  • Noncurrent assets are called long-term assets.

  • An important category of long-term assets is plant and equipment.

  • For many businesses plant and equipment represents a sizable investment.


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Current Liabilities both the income statement and the balance sheet.

Whiteside Antiques

Balance Sheet

December 31, 2010

Assets

Prepaid Interest

75.00

6,300.00

Total Current Assets

98,716.00

Total Plant and Equipment

31,900.00

Total current liabilities

Total Assets

130,616.00

Liabilities and Owner’s Equity

Current Liabilities

2,000.00

Notes Payable-Trade

Notes Payable-Bank

9,000.00

Accounts Payable

24,129.00

Interest Payable

20.00

Social Security Tax Payable

1,158.40

Medicare Tax Payable

267.40

Employee Income Tax Payable

990.00

Fed. Unemployment Tax Pay.

9.60

State Unemployment Tax Pay.

64.80

Salaries Payable

1,200.00

Sales Tax Payable

7,200.00

Total Current Liabilities

46,039.20


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Long-Term Liabilities both the income statement and the balance sheet.

  • Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly.

  • Long-term liabilities include mortgages, notes payable, and loans payable.


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Owner's Equity both the income statement and the balance sheet.

The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.


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Chapter both the income statement and the balance sheet.

13

Financial Statementsand Closing Procedures

Section 2: Completing the Accounting Cycle

Section Objectives

  • Journalize and post the adjusting entries.

  • Journalize and post the closing entries.

  • Prepare a postclosing trial balance.

  • Journalize and post reversing entries.

McGraw-Hill

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.


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Journalize and post the both the income statement and the balance sheet.

adjusting entries

Objective 4

  • All adjustments are shown on the worksheet.

  • After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records.

  • They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.


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Adjusting Entries both the income statement and the balance sheet.

Recognizes income earned in the period. The debit is to an asset account (Interest Receivable)

Accrued Income

(m – n)


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Journalize and Post the Closing Entries both the income statement and the balance sheet.

Objective 5

  • At the end of the period, the temporary accounts are closed.

  • The temporary accounts are:

    • Revenue accounts

    • Cost of goods sold accounts

    • Expense accounts

    • Drawing account


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  • Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary.

  • Close expense accounts and cost of goods sold accounts with debit balances to Income Summary.

  • Close Income Summary, which now reflects the net income or loss for the period, to owner's capital.

  • Close the drawing account to owner's capital.

There are four steps in the closing process:


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GENERAL JOURNAL credit balances to Income Summary. PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT

REF.

Closing Entries

2010

Dec. 31

Sales 561,650.00

Interest Income 166.00

Miscellaneous Income 366.00

Purchases Returns and Allowances 3,050.00

Purchases Discounts 3,130.00

Income Summary 568,362.00

Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances.

Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.


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Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances

Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.


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GENERAL JOURNAL Sold Accounts with Debit Balances PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT

REF.

Dec.31

Income Summary 50,955.80

Bill Whiteside, Capital 50,955.80

Step 3: Closing the Income Summary Account

  • The third closing entry transfers the Income Summary balance to the owner's capital account.

  • This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year.

  • For Whiteside Antiques, the third closing entry is as follows:

Income Summary

12/31 47,000.00

12/31 568,362.00 615,362.00Bal. 50,955.80

Adjusting Entries (a-b) 12/31 52,000.00Closing Entries 12/31 512,406.20564,406.20


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GENERAL JOURNAL Sold Accounts with Debit Balances PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT

REF.

Dec.31

Bill Whiteside, Capital 27,600.00

Bill Whiteside, Drawing 27,600.00

Step 4: Closing the Drawing account

This entry closes the drawing account and updates the capital account


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Posting the Closing Entries Sold Accounts with Debit Balances

  • The closing entries are posted from the general journal to the general ledger.

  • This process brings the temporary account balances to zero.

  • The word Closing is entered in the Description column.


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Preparing a Postclosing Trial Balance Sold Accounts with Debit Balances

Objective 6

  • Prepare a postclosing trial balance to confirm that the general ledger is in balance.

  • Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance.

  • The postclosing trial balance matches the amounts reported on the balance sheet.

  • To verify this, compare the postclosing trial balance with the balance sheet.


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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


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Preparing a Postclosing Trial Balance and owner's capital accounts—appear on the postclosing trial balance


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Journalize and post and owner's capital accounts—appear on the postclosing trial balancereversing 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.

Objective 7


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Step 2 and owner's capital accounts—appear on the postclosing trial balanceJournalize the data about transactions

Step 3Post the data about transactions

Step 4 Prepare a worksheet

Step 1Analyze transactions

Step 5Prepare financial statements

Step 6Journalize and post adjusting entries

Step 9Interpret the financial information

Step 7Journalize and post closing entries

Step 8Prepare a postclosing trial balance

The Accounting Cycle

Step 3Post the data about transactions

Step 2 Journalize the data about transactions

Step 4Prepare a worksheet

Step 1 Analyze transactions

Step 5Prepare financial statements

Step 6 Journalize and post adjusting entries

Step 9 Interpret the financial information

Step 7 Journalize and post closing entries

Step 8 Prepare a postclosing trial balance


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Thank You and owner's capital accounts—appear on the postclosing trial balance

for using

College Accounting

A Contemporary Approach, 1ST Edition

Haddock • Price • Farina